UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended: March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 0-17190
WASATCH EDUCATION SYSTEMS CORPORATION
(Exact name of small business issuer as specified in its charter)
UTAH 87-0458433
- ---------------------------------- ------------------------------------
(State or other jurisdiction of (IRS employer idebtification no.)
incorporation or organization)
5250 South 300 West, Suite 100
Salt Lake City, Utah 84107
(Address of principal executive offices)
(801) 261-1001
(Issuer's telephone number)
No Change
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
X yes no
The Company had 3,579,229 shares of common stock outstanding at May 10, 1996.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Wasatch Education Systems Corporation
Condensed Balance Sheet
(Unaudited)
March 31,
1996
Assets ---------
Current assets:
Cash $ 168,481
Accounts receivable, net of allowance for doubtful
accounts of $15,000 964,295
Inventories 68,238
Other current assets 35,293
---------
Total current assets 1,236,307
Equipment, furniture and fixtures, net of accumulated
depreciation of $629,129 243,438
Courseware development costs, net of accumulated
amortization of $1,836,407 4,086,471
Other assets, net 38,333
=========
Total assets $ 5,604,549
=========
Liabilities and stockholders' equity
Current liabilities:
Convertible subordinated debentures $1,197,000
Accounts payable 201,077
Accrued employee costs 299,268
Other accrued liabilities 55,273
Deferred revenue 287,202
---------
Total current liabilities 2,039,820
---------
Stockholders' equity:
Preferred stock, 20,000,000 shares authorized:
Series A convertible redeemable, 4,429,870 shares
outstanding, $4,429,870 involuntary liquidation
value 4,655,724
Series B $.375 cumulative convertible redeemable,
91,151 shares outstanding, $158,254
involuntary liquidation value 118,496
Series C non-convertible redeemable,
5,300,000 shares outstanding, $5,300,000
preferred liquidation value 5,300,000
Common stock, no par value; 200,000,000 shares
authorized, 3,579,229 shares issued and outstanding 11,754,072
Accumulated deficit (18,263,563)
-----------
Total stockholders' equity 3,564,729
-----------
Total liabilities and stockholders' equity $ 5,604,549
===========
The accompanying notes are an integral part of this condensed balance sheet.
<PAGE>
Wasatch Education Systems Corporation
Condensed Statements of Operations
(Unaudited)
Three Months Ended March 31,
1996 1995
-------------- ------------
Revenue:
Courseware license rights $ 770,728 $ 756,277
Services and other 281,276 415,994
-------------- ------------
1,052,004 1,172,271
-------------- ------------
Cost of revenue:
Courseware license rights 278,338 240,311
Services and other 142,743 461,522
-------------- ------------
421,081 701,833
-------------- ------------
Gross margin 630,923 470,438
-------------- ------------
Operating expenses:
General and administrative 405,847 298,132
Sales and marketing 176,070 178,078
Research and development 93,442 71,450
-------------- ------------
675,359 547,660
-------------- ------------
Loss from operations (44,436) (77,222)
Other income (expense):
Litigation settlement 70,000 -
Interest expense, net of interest income 40,288 251,475
-------------- ------------
Net loss (14,724) (328,697)
Unpaid and undeclared preferred stock
dividends 4,546 4,546
============== =============
Net loss attributable to common
stockholders $(19,270) $(333,243)
============== =============
Net loss per common share $ (.01) $ (.17)
============== =============
Weighted average common shares outstanding 3,579,229 1,907,563
============== =============
The accompanying notes are an integral part of these condensed statements.
<PAGE>
Wasatch Education Systems Corporation
Condensed Statements of Operations
(Unaudited)
Nine Months Ended March 31,
1996 1995
------------- ------------
Revenue:
Courseware license rights $ 1,873,516 $ 2,717,406
Services and other 624,194 1,002,286
----------- -----------
2,497,710 3,719,692
----------- -----------
Cost of revenue:
Courseware license rights 771,132 654,802
Services and other 462,939 1,235,026
----------- -----------
1,234,071 1,889,828
----------- -----------
Gross margin 1,263,639 1,829,864
----------- -----------
Operating expenses:
General and administrative 1,023,588 645,943
Sales and marketing 563,054 427,978
Research and development 228,116 252,965
----------- -----------
1,814,758 1,326,886
----------- -----------
Income (loss) from operations (551,119) 502,978
Other income (expense):
Litigation settlement 70,000 --
Interest expense, net of interest income 121,209 728,514
----------- -----------
Net loss (602,328) (225,536)
Unpaid and undeclared preferred stock
dividends 13,638 13,638
----------- -----------
Net loss attributable to common
stockholders $ (615,966) $ (239,174)
=========== ===========
Net loss per common share $ (.17) $ (.17)
=========== ===========
Weighted average common shares outstanding 3,573,323 1,907,563
=========== ===========
The accompanying notes are an integral part of these condensed statements.
<PAGE>
Wasatch Education Systems Corporation
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended March 31,
1996 1995
----------- ----------
Cash flows from operating activities:
Net loss $ (602,328) $ (225,536)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 873,973 752,735
Increase (decrease)in cash from:
Accounts and contract receivable 703,889 438,428
Inventories (6,950) 8,688
Other current assets 12,884 68,054
Accounts payable (114,935) (216,480)
Accrued interest payable to
related parties - 608,990
Accrued liabilities (199,274) (234,790)
Deferred revenue (80,032) (155,247)
----------- -----------
Net cash provided by operating activities 587,227 1,044,842
----------- -----------
Cash flows from investing activities:
Purchase of equipment, furniture and
fixtures (84,976) (19,405)
Additions to courseware development costs (409,920) (1,137,664)
----------- -----------
Net cash used in investing activities (494,896) (1,157,069)
----------- -----------
Increase (decrease) in cash 92,331 (112,227)
Cash at beginning of period 76,150 206,043
----------- -----------
Cash at end of period $ 168,481 $ 93,816
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 121,715 $ 121,706
=========== ===========
Cash paid for income taxes $ 13,856 $ --
=========== ===========
The accompanying notes are an integral part of these condensed statements.
<PAGE>
Wasatch Education Systems Corporation
Notes to Condensed Financial Statements
(Unaudited)
(1) PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been prepared by
the Company in accordance with the rules and regulations of the Securities and
Exchange Commission for Form 10-QSB, and accordingly, do not include all of the
information and footnotes required by generally accepted accounting principles.
In the opinion of management, these financial statements reflect all
adjustments, which consist of normal recurring adjustments, which are necessary
to present fairly the Company's financial position, results of operations and
cash flows as of March 31, 1996 and for the periods presented herein. These
unaudited financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1995. The results of operations for
the three and nine months ended March 31, 1996 are not necessarily indicative of
the results that may be expected for the remainder of the fiscal year ending
June 30, 1996.
(2) INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." SFAS No. 109 requires the use of the
liability method for financial reporting purposes which differs from the
deferred method previously required by generally accepted accounting principles.
The components of deferred tax assets as of June 30, 1995 and March 31, 1996 are
as follows:
June 30, March 31,
1995 1996
--------- -----------
Tax net operating loss $4,372,000 $4,581,000
Revenue deferred for
financial reporting 140,000 109,000
Reserves and accrued
liabilities 41,000 85,000
----------- ----------
Total deferred tax assets 4,553,000 4,775,000
Valuation allowance (4,553,000) (4,755,000)
----------- ----------
Deferred tax assets $ -- $ --
=========== ==========
(3) LICENSE AGREEMENT
Effective September 30, 1995, the Company entered into a licensing agreement
with The Roach Organization, Inc., doing business as TRO Learning ("TRO"). The
license agreement grants TRO a world-wide, non-transferable, exclusive license
to distribute certain of the Company's products as part of the courseware system
marketed by TRO. The term of the agreement and the license is two years and one
month commencing September 30, 1995 and ending October 31, 1997. The Company
recognized income from a one-time licensing fee of $550,000 upon execution of
the agreement which is non-refundable. Additionally, TRO has guaranteed a
minimum royalty revenue to the Company of $800,000 for the period beginning
November 1, 1996 through June 30, 1997. The Company has no future obligations
with respect to service, support or product.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations:
The following are explanations of significant period to period changes for the
three months ended March 31, 1996 and 1995.
Revenue for the three months ended March 31, 1996 of $1,052,000 decreased
$120,000 or 10 percent, compared to the three months ended March 31, 1995.
Courseware license rights increased by $15,000 or 2 percent to $771,000 for the
three months ended March 31, 1996 from $756,000 for the three months ended March
31, 1995. Services and other revenues decreased $135,000 or 32 percent to
$281,000 for the three months ended March 31, 1996 from $416,000 for the three
months ended March 31, 1995. Customer support renewal revenues decreased
$128,000 to $161,000 at March 31, 1996 from $289,000 at March 31, 1995. This
decrease is primarily the result of the Company lowering its annual customer
support renewal fee, with a corresponding reduction in the support requirements
for the renewal contracts.
Gross margins increased by $161,000 or 34 percent to $631,000 for the three
months ended March 31, 1996 from $470,000 for the three months ended March 31,
1995. This increase is primarily the result of the reclassification of
commissions from cost of goods sold to sales and marketing expense. And to a
lesser extent due to a decrease of $44,000 relating to hardware costs from the
prior fiscal period.
Operating expenses increased by 23 percent or $127,000 to $675,000 for the three
months ended March 31, 1996 from $548,000 for the three months ended March 31,
1995. General and administrative expenses increased $108,000 or 36 percent to
$406,000 for the three months ended March 31, 1996 from $298,000 for the three
months ended March 31, 1995. This increase is primarily due to an increase in
legal fees due to litigation as discussed below and accruals for certain key
employee incentive programs. Sales and marketing expenses decreased $2,000 for
the period. Research and development expenses increased $22,000 or 31 percent to
$93,000 for the three months ended March 31, 1996 from $71,000 at March 31,
1995. This increase is primarily due to the Company incurring a greater
percentage of development costs that are not capitalized.
Operating income increased by $33,000 to a deficit of $44,000 for the three
months ended March 31, 1996 compared to a deficit of $77,000 for the three
months ended March 31, 1995.
During the three months ended March 31, 1996 the Company recognized other income
of $70,000 related to litigation settlement involving an outside development
firm which was under contract to port certain of the Company's windows products
to certain Microsoft and Macintosh platforms, the latter of which was not
performed.
Net interest expense decreased by $211,000 to $40,000 for the three months ended
March 31, 1996 from $251,000 for the three months ended March 31, 1995. This
decrease is primarily the result of the debt to equity conversion which was
effective on June 30, 1995, wherein, $5,500,000 in related-party debt was
exchanged for a combination of 5,300,000 shares of Series C Non-convertible
Redeemable Preferred Stock and 1,666,666 shares of common stock.
The following are explanations of significant period to period changes for the
nine months ended March 31, 1996 and 1995.
Revenue for the nine months ended March 31, 1996 of $2,498,000 decreased
$1,222,000 or 33 percent, compared to the nine months ended March 31, 1995.
Revenue from courseware license rights decreased by $843,000 or 31 percent to
$1,874,000 for the nine months ended March 31, 1996 from $2,717,000 for the nine
months ended March 31, 1995.
<PAGE>
This decrease is primarily attributable to the reorganization and enlargement of
the Company's sales force. The Company has shifted from a combination of a
direct sales force and dealers to exclusively dealers and has built a network
comprised of over 30 dealers with approximately 80-90 total representatives
marketing the Company's products. During the first half of fiscal year 1996, the
Company focused on putting into place and training these dealer organizations.
Due to the time involved in training the dealers and the relatively long sales
lead times in the industry (6-9 months), sales levels declined. Additionally,
the overall market was very sluggish during the nine months as schools with
Chapter I money available seemed reluctant to commit these funds. Services and
other revenues decreased $378,000 or 38 percent to $624,000 for the nine months
ended March 31, 1996 from $1,002,000 for the nine months ended March 31, 1995.
Of this decrease, $101,000 is the result of lower text and consumable sales
which resulted from the lower courseware sales. Customer support renewal
revenues decreased $284,000 to $398,000 at March 31, 1996 from $682,000 at March
31, 1995. This decrease is primarily the result of the Company lowering its
annual customer support renewal fee, with a corresponding reduction in the
support requirements for the renewal contracts. This decrease was partially
offset by an increase in other related service revenues.
Gross margins decreased by $566,000 or 31 percent to $1,264,000 for the nine
months ended March 31, 1996 from $1,830,000 for the nine months ended March 31,
1995. This decrease is primarily the result of lower overall sales.
Operating expenses increased by 37 percent or $488,000 to $1,815,000 for the
nine months ended March 31, 1996 from $1,327,000 for the nine months ended March
31, 1995. General and administrative expenses increased $378,000 or 59 percent
to $1,024,000 for the nine months ended March 31, 1996 from $646,000 at March
31, 1995. This increase was primarily due to an increase in legal fees due to
litigation as discussed below and accruals made for certain key employee
incentive programs. Sales and marketing expenses increased $135,000 or 32
percent to $563,000 for the nine months ended March 31, 1996 from $428,000 for
the nine months ended March 31, 1995. This increase is primarily the result of
the increased effort during the first nine months of fiscal year 1996 to
establish and train the dealer network. Additionally, dealer commissions were
reclassified from cost of good sold to sales and marketing expense.
Operating income decreased by $1,054,000 to a deficit of $551,000 for the nine
months ended March 31, 1996 compared to operating income of $503,000 for the
nine months ended March 31, 1995.
During the nine months ended March 31, 1996 the Company recognized other income
of $70,000 relating to a litigation settlement involving an outside development
firm which was under contract to port certain of the Company's windows products
to certain Microsoft and a Macintosh platforms, the latter of which was not
performed.
Net interest expense decreased by $607,000 to $122,000 for the nine months ended
March 31, 1996 from $729,000 for the nine months ended March 31, 1995. This
decrease is primarily the result of the debt to equity conversion which was
effective on June 30, 1995, wherein, $5,500,000 in related party debt was
exchanged for a combination of 5,300,000 shares of Series C Non-convertible
Redeemable Preferred Stock and 1,666,666 shares of common stock.
Liquidity and Capital Resources:
At March 31, 1996, the Company had liquid resources (cash and accounts
receivable) of $1,133,000, a decrease of 35 percent or $611,000 from June 30,
1995 when liquid resources were $1,744,000. Cash increased $92,000 primarily as
a result of efforts to collect outstanding accounts receivable. Accounts and
contract receivables decreased $704,000 or 42 percent to $964,000 primarily due
to the lower overall sales level.
Current assets decreased by $632,000 or 34 percent to $1,236,000 at March 31,
1996 from $1,868,000 at June 30, 1995. This decrease was primarily the result of
a $704,000 decrease in accounts receivable, with an offsetting increase in cash
of $92,000.
<PAGE>
Long-term assets as of March 31, 1996 were $4,368,000 compared to $4,733,000 at
June 30, 1995. This decrease was primarily the result of increased amortization
and a lower level of courseware development costs being capitalized.
Current liabilities of the Company increased by $803,000 to $2,040,000 at March
31, 1996 from 1,237,000 at June 30, 1995. Of this increase, $1,197,000 is the
change in classification of the convertible subordinated debentures from
long-term to short-term liabilities. Accounts payable decreased $115,000 as a
result of an effort to pay vendors within the agreed payment terms. Other
accrued liabilities decreased $213,000 primarily as a result of the payment
during the nine months of commissions and tax liabilities that were accrued as
of June 30, 1995.
The Company's working capital decreased by $1,435,000 from $631,000 at June 30,
1995 to a deficit of $804,000 at March 31, 1996. This decrease is primarily the
result of the change in classification of the convertible subordinated
debentures from long-term to short-term liabilities and lower accounts
receivable.
Stockholders' equity decreased by $602,000 to $3,565,000 at March 31, 1996 from
$4,167,000 at June 30, 1995 due to the $602,000 net loss for the nine month
period.
In the opinion of management, debt and equity capital resources should be
increased for the Company to fully pursue its goals in the next twelve months.
The Company is addressing the need for longer-term growth capital by pursuing
new sources of investment funding. Additionally, the Company has secured a
source for its short-term working capital needs through an accounts receivable
financing arrangement. While management believes that the Company can continue
its current operating strategy without additional funding, cash flows are
difficult to forecast accurately. Therefore, there can be no assurance that
additional capital will not be required, nor that it will be available on terms
which are acceptable to the Company. The Company has $1,197,000 of convertible
subordinated debentures that are due on July 31, 1996. Funds from operations may
not be adequate to repay these debentures. Should the Company not have available
funds to repay these debentures it will pursue an extension of the due date.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on January 26, 1996. The
following members of the Board of Directors were elected for one-year terms
expiring at the meeting of shareholders in 1997, or until their respective
successors are elected and qualified.
Name Shares Voted For Shares Withheld
Barbara Morris 2,902,316 4,706
Gregory George 2,901,688 5,334
Jeffrey Keimer 2,901,837 5,125
Carolyn Poe 2,903,339 3,623
The shareholders ratified the adoption of the Company's 1995 Executive Officer
Stock Option Plan.
Shares Voted For Shares Voted Against Abstentions
2,486,752 19,219 5,752
The shareholders ratified the adoption of the Company's 1995 Employee Stock
Option Plan.
Shares Voted For Shares Voted Against Abstentions
2,493,107 15,201 3,415
The shareholders ratified the appointment of Arthur Andersen LLP as independent
certified public accountants for the Company for the fiscal year ending June 30,
1996.
Shares Voted For Shares Voted Against Abstentions
2,903,065 1,115 2,842
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASATCH EDUCATION SYSTEMS CORPORATION
/s/Barbara Morris May 10, 1996
Barbara Morris, President & CEO Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Balance Sheet
and Income Statement dated March 31, 1996 on Form 10-QSB, and is qualified in
its entirety by reference to such Form 10-QSB dated March 31, 1996.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 168,481
<SECURITIES> 0
<RECEIVABLES> 979,295
<ALLOWANCES> 15,000
<INVENTORY> 68,238
<CURRENT-ASSETS> 1,236,307
<PP&E> 872,567
<DEPRECIATION> 629,129
<TOTAL-ASSETS> 5,604,549
<CURRENT-LIABILITIES> 2,039,820
<BONDS> 0
0
10,074,220
<COMMON> 11,754,072
<OTHER-SE> (18,263,563)
<TOTAL-LIABILITY-AND-EQUITY> 5,604,549
<SALES> 2,497,710
<TOTAL-REVENUES> 2,497,710
<CGS> 1,234,071
<TOTAL-COSTS> 1,234,071
<OTHER-EXPENSES> 228,116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121,209
<INCOME-PRETAX> (602,328)
<INCOME-TAX> 0
<INCOME-CONTINUING> (602,328)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (602,328)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
